Question

• A MAJOR POTENTIOMETER MANUFACTURER IS CONSIDERING TWO ALTERNATIVES FOR NEW PRODUCTION MACHINES WITH CAPACITY TO PRODUCE 20 000 UNITS PER DAY. ONE ALTERNATIVE IS FOR A HIGH-CAPACITY AUTOMATED PRODUCTION MACHINE CAPABLE OF PRODUCING 20 000 UNITS PER DAY WHEN OPERATED FOR THREE SHIFTS PER DAY. A QUARTER-TIME EMPLOYEE WOULD BE ASSIGNED TO MONITOR THE MACHINE (EMPLOYEE WOULD MONITOR OTHER MACHINES AT THE SAME TIME). WITH THE THREE-SHIFT SCHEDULE THIS WOULD BE EQUIVALENT TO A THREE-QUARTER-TIME EMPLOYEE.

• A SECOND ALTERNATIVE WOULD BE TO USE TWO MANUALLY OPERATED MACHINES, EACH CAPABLE OF 10 000 UNITS PER DAY ASSUMING THREE-SHIFT OPERATION. HERE, A TOTAL OF SIX EMPLOYEES (2 PER SHIFT, 3 SHIFTS) WOULD BE NEEDED.

• IF LABOR COSTS (INCLUDING WAGES, BENEFITS, ETC.) ARE $40 000 PER EMPLOYEE PER YEAR, RECOMMEND WHICH ALTERNATIVE IS BEST USING THE EQUIVALENT UNIFORM ANNUAL COST METHOD

	Alternative 1	Alternative 2
Cost to purchase	$500 000	$100 000
Number of machines required	1	2
Number of employees required	2	6
Expected life of machine	10 yr	10 yr
Interest rate	8%	8%
Annual maintenance cost per machine	$30 000	$10 000
Salvage value at 10 years per machine	$100 000	$20 000

Answer 1